U.S. Companies: All My Bags Are Packed

August 20, 2015

The U.S. Government is trying to halt a wave of corporate emigration through inversions (merging with a foreign company to relocate abroad). But instead of creating incentives for companies to stay on American soil, the U.S. Treasury is making it harder for them to leave by closing loopholes on an existing rule whereby companies that are 80% or more owned by American shareholders would be taxed as a domestic entity regardless of their head-office location. according to The Economist. The possibility to use capital held by foreign subsidiaries to complete acquisitions was also curbed.

After the changes some deals were called off but many other firms are still seeking an inversion because remaining in America is way too costly for them. Moreover, these migrations are likely to trigger similar moves by competitors as they too seek a tax advantage.

The article emphasizes that:

If companies remain in America, they must pay a 39% tax rate on foreign earnings, by contrast, many countries tax firms only on their profits earned within their borders.

Companies that move abroad also have to liberty to move cash freely between subsidiaries.

The stricter inversion rules could make American firms easy takeover targets by foreign rivals.

If the trend continues the U.S. will lose not only tax revenue but corporate jobs as well.

Even though these relocations have been mainly "paper moves", as low-tax countries start requiring a more significant presence, many corporations could start shifting more of their operations to their new addresses.